A Worried Government Trapped on Inflation

By

Iain Martin

Jan 18, 2011 1:42 pm GMT

Mark Field MP asks whether “the authorities” have decided that tackling inflation will be too painful, and have thus decided to avoid dealing with it. Perhaps a decision has been taken to let inflation rip — to enable the government to inflate away its debts.

Bank of England watchers report that this is not how Mervyn King’s team views it. The latest figures are pretty eye-watering (the government’s CPI measure shows it jumping in December to an annual 3.7% from 3.3% in November and RPI is even higher at 4.8%). But King maintains higher inflation is a blip — an extremely long-running blip if that’s the case. Just wait and see, he argues, inflation will subside and the important thing now is to prop up demand with low interest rates.

According to the BOE there are special factors in Britain — such as the devaluation of sterling forcing up the price of imports. They think higher inflation is a temporary short-term phenomenon and that it will flow through the system. The argument is that it isn’t (yet) feeding through into higher wage demands — a sign, it is said, that many workers are just pleased to have a job and are perhaps prepared to accept, although not enjoy, the ongoing fall in purchasing power and living standards. For how long though?

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.